21. Earnings (Loss) per Common Share

Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of earnings per share pursuant to the two-class method prescribed by the Earnings Per Share Topic of the ASC. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In May 2013, as discussed in Note 13 to the consolidated financial statements, Hilltop issued Restricted Stock Awards which qualify as participating securities.

Net earnings, less any preferred dividends accumulated for the period (whether or not declared), is allocated between the common stock and participating securities pursuant to the two-class method. Basic earnings per common share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested restricted shares.

Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares, excluding the participating securities, were issued using the treasury stock method. For all periods presented, stock options are the only potentially dilutive non-participating instruments issued by Hilltop. Next, we determine and include in diluted earnings per common share calculation the more dilutive effect of the participating securities using the treasury stock method or the two-class method. Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under the two-class method as the holders are not contractually obligated to share in the losses of the Company.

The following table presents the computation of basic and diluted earnings (loss) per common share (in thousands, except per share data).

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Basic earnings (loss) per share:
Income (loss) applicable to Hilltop common stockholders	$	31,831		$	(4,048	)	$	85,144		$	(14,414	)
Less: income applicable to participating shares	(176		)	—			(472		)	—
Net earnings (loss) available to Hilltop common stockholders	$	31,655		$	(4,048	)	$	84,672		$	(14,414	)

Weighted average shares outstanding - basic	83,493			56,363			83,490			56,408

Basic earnings (loss) per common share	$	0.38		$	(0.07	)	$	1.01		$	(0.26	)

Diluted earnings (loss) per share:
Income (loss) applicable to Hilltop common stockholders	$	31,831		$	(4,048	)	$	85,144		$	(14,414	)
Add: interest expense on senior exchangeable notes (net of tax)	1,053			—			3,158			—
Net earnings (loss) available to Hilltop common stockholders	$	32,884		$	(4,048	)	$	88,302		$	(14,414	)

Weighted average shares outstanding - basic	83,493			56,363			83,490			56,408
Effect of potentially dilutive securities	6,967			—			6,761			—
Weighted average shares outstanding - diluted	90,460			56,363			90,251			56,408

Diluted earnings (loss) per common share	$	0.36		$	(0.07	)	$	0.98		$	(0.26	)

For each of the three and nine months ended September 30, 2012, the computation of diluted loss per common share did not include 6,208,000 equivalent shares of senior exchangeable notes as the equivalent exchange rate per share was in excess of the average stock prices for the noted periods. Additionally, options to purchase 700,000 shares of Hilltop’s common stock were not included in the computation of diluted loss per common share for each of the three and nine months ended September 30, 2012, as their inclusion would have been anti-dilutive.